The Economics of Excess: Addiction, Indulgence, and Social Policy
208
The Economics of Excess: Addiction, Indulgence, and Social Policy
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Overview
Chapter One provides a thorough discussion of economic models of addiction. The model developed in most detail takes into account both standard and behavioral approaches. The next three chapters examine specific indulgences: smoking, drinking, and overeating. The heart of this book is its comprehensive discussion of what is often referred to as the "new paternalism." Many economists are now challenging the more traditional belief that, unless they are harming others, people should be left to their own indulgences. As more and more economists are arguing for policies that are designed to protect people from themselves, this book offers a serious, yet accessible, discussion of the pros and cons of such interventions.
Written in an approachable style, this book will serve researchers who are new to the economics of addiction and students in a variety of economics and policy courses alike.
Product Details
| ISBN-13: | 9780804761482 |
|---|---|
| Publisher: | Stanford University Press |
| Publication date: | 08/16/2011 |
| Pages: | 208 |
| Product dimensions: | 6.00(w) x 8.80(h) x 0.70(d) |
About the Author
Read an Excerpt
THE ECONOMICS OF EXCESS
ADDICTION, INDULGENCE, AND SOCIAL POLICY?
By HAROLD WINTER
STANFORD UNIVERSITY PRESS
Copyright © 2011Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved.
ISBN: 978-0-8047-6147-5
Excerpt
CHAPTER 1
THE ECONOMICS OF ADDICTION
When discussing addictive behavior we need a clear definition of the term addiction. It is not difficult to find definitions of addiction. The truly difficult task is deciding which of the phenomenally similar, but not identical, definitions to present. Here are two examples:
• a physiological and psychological compulsion for a habit-forming substance. In extreme cases, an addiction may become an overwhelming obsession (http://www.personalinjuryfyi.com/glossary.html)
• a chronic, relapsing disease characterized by compulsive drug-seeking and use and by neurochemical and molecular changes in the brain (http:www.tobaccofreeqc.org/youth/glossary.php)
With words such as compulsion, obsession, and disease used to define it, addiction is certainly not considered to be a beneficial activity. Even healthy activities such as exercising or eating well acquire the label exercise nut or health nut for those who practice them excessively.
The American Psychiatric Association offers a more thorough definition:
Answer yes or no to the following seven questions. Most questions have more than one part, because everyone behaves slightly differently in addiction. You only need to answer yes to one part for that question to count as a positive response.
1. Tolerance. Has your use of drugs or alcohol increased over time?
2. Withdrawal. When you stop using, have you ever experienced physical or emotional withdrawal? Have you had any of the following symptoms: irritability, anxiety, shakes, sweats, nausea, or vomiting.
3. Difficulty controlling your use. Do you sometimes use more or for a longer time than you would like? Do you sometimes drink to get drunk? Do you stop after a few drinks usually, or does one drink lead to more drinks?
4. Negative consequences. Have you continued to use even though there have been negative consequences to your mood, self-esteem, health, job, or family?
5. Neglecting or postponing activities. Have you ever put off or reduced social, recreational, work, or household activities because of your use?
6. Spending significant time or emotional energy. Have you spent a significant amount of time obtaining, using, concealing, planning, or recovering from your use? Have you spent a lot of time thinking about using? Have you ever concealed or minimized your use? Have you ever thought of schemes to avoid getting caught?
7. Desire to cut down. Have you sometimes thought about cutting down or controlling your use? Have you ever made unsuccessful attempts to cut down or control your use?
If you answered yes to at least 3 of these questions, then you meet the medical definition of addiction. (http://www.addictionsandrecovery.org/definition-of-addiction.htm)
Although less judgmental than the previous definitions, an underlying negative feel is still associated with this more complete definition.
In contrast, the standard economic definition of addiction is judgment free. Here is an example taken from the seminal work on the economics of rational addiction (Becker and Murphy, 1988):
The basic definition of addiction at the foundation of our analysis is that a person is potentially addicted to a good if an increase in his current consumption of the good increases his future consumption of the good. (681)
That may not be an elaborate definition, but it has some strong points in its favor. Unlike many of the other definitions of addiction, the economic definition describes behavior, it does not condemn it. Quite simply, addictive behavior depends on how consumption in one period affects consumption in another period. If the more you smoke today, the more you want to smoke tomorrow, smoking is addictive. But likewise, if the more you exercise today, the more you want to exercise tomorrow, exercising is addictive. With this definition, you can consider the consumption of any good to be potentially addictive. Furthermore, there is no reason to identify or distinguish between physical addiction and psychological addiction. The only important trait to identify is a person's consumption pattern over time.
Thinking about addiction as a consumption issue allows us to raise the types of questions in which an economist specializes. How do price changes affect the consumption of addictive goods? What about income changes, information changes, or the costs of quitting? How do regulations or criminal laws affect consumption? More generally, we can challenge the premise that addicts are somehow "trapped" by their addiction. As we do with other consumer products, we can predict that addicts make rational choices when consuming addictive goods. In other words, an addict will rationally choose to trade off short-term benefits (getting high) with long-term costs (future health problems). If addicts are making these trade-offs, we must address precisely how they compare future costs to current benefits. This comparison lies at the heart of the economic theory of addiction.
The Subjective Rate Of Time Preference
Consider the following thought experiment. You are asked to choose between the following two options: receive $1,000 today or receive $1,000 exactly one year from today. Which option would you choose, keeping in mind that there is no right or wrong answer? By far, the most common choice is the $1,000 today, and let's assume that's your choice also. How would you answer a follow-up question: Would you prefer $1,000 today or $1,100 one year from today? Still the $1,000 today? How about $1,200 in one year? Not enough? How about $1,300, $1,400, or as much as $1,500? What would it take to get you to choose the future amount? Eventually, we can find a future amount that you would choose over the current amount of $1,000. What this experiment is trying to demonstrate is that, dollar for dollar, we prefer current dollars over future ones. In fact, most of us must be paid a premium, perhaps a large premium, before we're willing to give up a current payment for a future one. More succinctly, most people tend to be impatient to some degree, while addicts are often thought of as being highly impatient.
Economists have a simple tool for numerically measuring a person's level of impatience—the discount factor (usually depicted by the symbol d, the Greek letter delta). Using the hypothetical example from above, assume that you are perfectly indifferent as to whether you receive $1,000 today or $1,500 one year from today. What is meant by "perfectly indifferent" is that if you are offered $1,499 one year from today, you strictly prefer the current amount of $1,000, and if you are offered $1,501 one year from today, you strictly prefer the future amount of $1,501. At $1,500 one year from today, you truly don't see a difference between the current and the future options. In this case, because the current amount of $1,000 is equivalent to the future amount of $1,500, we can say that you discount the future amount by two-thirds (1,000 / 1,500). Equivalently, we can say that you have a discount factor of two-thirds, or d = .67, approximately.
In economic terms, the discount factor is a measure of a person's rate of time preference. How impatient is a person when considering current versus future trade-offs? As the discount factor becomes larger (closer to 1), the person is less impatient (or more patient). As the discount factor becomes smaller (closer to 0), the person is more impatient (or less patient). It is very important to recognize that the discount factor is a subjective measure of impatience. To a typical economist, there is no such thing as a right or wrong (or a good or bad) level of impatience. A rate of time preference is precisely that—a preference. Yet, when scholars discuss public policy justifications for controlling addictive behavior, addicts' supposed shortsightedness is often at the top of the list of justifications.
The concept of impatience is of paramount importance when discussing addictive behavior, and we examine it in careful detail. Typically, addicts are thought of as being more impatient than nonaddicts. In its simplest form, addiction is a trade-off between the current benefits the addict reaps from smoking, drinking, using drugs, and so on, and the future costs the addict will bear from poorer health or increased health care costs. Compared to their farsighted counterparts, shortsighted (or myopic) people place little weight on future outcomes, so the current benefits of drug use, for example, are given more weight than the future health costs. Farsighted people, on the other hand, place more weight on future health costs, making them less likely to indulge in excesses today.
Impatience is a crucial quality to consider when discussing many types of behaviors, not only addiction. Consider the war against terrorism. One of the most frightening weapons some terrorists use is themselves. How do we fight someone willing to strap on a bomb and detonate it in a public place? A suicide bomber is likely to have an extremely low discount factor—they place virtually no value on future events. This makes it very difficult to deter suicide bombers. If they don't care about the future, if they don't even care about tomorrow, the threat of future punishment has no effect on them.
In a similar vein, criminals in general are believed to be far more shortsighted than noncriminals. A typical criminal weighs the current benefits of committing a crime against the future costs of apprehension, conviction, and punishment. A very myopic criminal is not easily deterred by the threat of future imprisonment. Severe penalties, such as the three-strikes law that harshly punishes a third offense, or hard labor, or capital punishment, are often justified as necessary sanctions to discourage certain costly criminal behavior.
It is not uncommon, on the basis of these examples, for shortsighted preferences to be associated with behaviors that are often considered bad or costly, not only from a social perspective but from an individual perspective as well. It is sometimes suggested that education or information would help shortsighted people become more patient, and that very well may be true. But economists usually view myopia as a preference, and it is not a simple thing to change someone's preferences. In fact, economists typically take preferences as given, meaning that we have very little to say about them other than that they exist. We may be able to predict different behaviors according to different levels of impatience, but we don't often criticize preferences themselves.
The Rational Addict
Describing addiction as a rational act is a result of accepting preferences as givens and making no judgments. Precisely how does a rational addict behave? Assume you are deciding whether to begin smoking today. You know that if you start smoking, it will affect how much you want to smoke in the future. You also know that, whatever benefits you reap from smoking, eventually you will face adverse effects and long-term health costs. If you are fully informed about all the benefits and costs of smoking throughout your entire life, you can decide if your lifetime costs of starting to smoke today exceed the future benefits or if it is the other way around.
But knowing future benefits and costs of smoking is only the starting point. You can't just add up all the benefits, add up all the costs, and see which is the larger of the two. You must also consider your rate of time preference. Any costs or benefits that accrue to you in the future need to be properly discounted to be comparable in a current sense. A $1,000 cost 10 years from now is not the same, in a current sense, as a $1,000 cost 9 years from now, which is not the same as a $1,000 cost 8 years from now, and so on. The further into the future you expect to receive a benefit or cost, the less it is worth to you today. Thus, if most of the benefits from smoking are in the near future, and most of the costs, even if substantial, are in the far future, you may give more weight to the current benefits of smoking than the future costs.
For a proper rational calculation of all the benefits and costs, you must apply your subjective discount factor to all future values. Still, the fundamental cost-benefit analysis for you is basically the same. Once you calculate your current value of all the benefits and costs of smoking today, you can then decide your best course of action. Notice, with this reasoning, both decisions— to start smoking or to refrain from smoking—can be fully rational acts. Smoking is like any other activity. If you decide to smoke, it is because you believe it is in your best interest. It is not that there are no costs to smoking, it is just that those costs (properly discounted) are outweighed by the benefits (also properly discounted).
While the concept of rational addict has appeal as a theoretical construct, this simple representation has problems. Most obviously, why should we believe that you are fully informed about all the costs and benefits of consuming an addictive product throughout your life? It may not be difficult to believe you understand the benefits, as they are often largely subjective, but how well do you truly appreciate the long-term health risks of your addictive behavior? Do you fully understand the costs associated with excessive smoking, drinking, or eating? Informational deficiencies offer an important justification for social policy intervention to protect people from themselves, and this is discussed in later chapters. What is far more interesting, however, is that there may be shortcomings to the rational-addiction model even when you are fully informed. You may make a rational, fully informed decision to start smoking that is correctly based on every cost and benefit you experience throughout your life yet still end up regretting your decision. This is where the behavioral economists step in.
Printers, Rebates, and Time Consistency
Thinking about addiction in a rational framework presents a challenge for many people, as it may be difficult to accept economic results based on models in which a person chooses to consume harmful addictive goods such as drugs or cigarettes. Sometimes an example involving a product that everyone can easily relate to clearly illustrates key concepts. The decision to purchase a computer printer offers just such an example.
Let's assume Tim, Nate, and Sophia are all considering purchasing a specific computer printer. This particular printer has all the features they desire, but they find the price just a little too high. At the listed price, none of them choose to buy the printer. Fortunately for them, the company that produces the printer is offering a rebate special. A rebate deal involves actions in three distinct periods. In the first period, you decide whether to buy the printer. If you do buy it, in the second period you do whatever is necessary to qualify for the rebate. For example, you may have to fill in some paperwork, go to the post office, participate in an online or telephone customer service survey, and so on. In other words, you must bear a cost to submit the rebate request. If you submit the rebate request, in the third period you receive your rebate. How you approach a rebate deal depends on what type of person you are.
Let's start with Tim. Tim will pay the high price this period only if he plans on submitting the rebate request next period. He knows that, in the future, he will incur a cost of submitting the request, but further into the future he will receive a benefit. To make his decision, he asks himself a question: If I buy the printer this period, will I submit the rebate request next period? To answer that question, Tim has the ability to think of himself as being in the second period. From that perspective, he incurs a current cost but receives a future benefit, and when properly calculating the current value (that is, discounting the future benefit), he finds it in his best interest to submit the request. Knowing that he will submit the rebate request, Tim (in the first period) calculates the current value of buying the printer, submitting the request, and receiving the rebate. On the basis of his properly discounted cost-benefit calculation, Tim decides to buy the printer this period. He follows through and submits the rebate request next period, and he receives his rebate in the third period.
Now let's turn to Nate. Nate faces the same decision that Tim does, but Nate approaches the problem in a slightly different way. Nate does not have the ability to project forward and think of himself as being in the second period. Instead, Nate makes his decision from only the first period's perspective. So Nate discounts both the future cost of submitting the rebate request and the future benefit of receiving the rebate, and he finds that it is in his best interest to buy the printer with the intention of requesting the rebate. But there is a twist. After buying the printer and getting to the second period, Nate must now decide if he wants to incur the cost of submitting the rebate request. To do this, he calculates the current (second period) value of the future (third period) benefit, compares it to the current cost, and finds that the cost outweighs the benefit. In other words, when actually in the second period, Nate does not find it worthwhile to submit the rebate request. Nate ends up buying the printer, not submitting the rebate request, and not receiving a rebate. Thus, Nate ends up with a printer he does not value at the price he paid.
(Continues...)
Excerpted from THE ECONOMICS OF EXCESS by HAROLD WINTER. Copyright © 2011 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of STANFORD UNIVERSITY PRESS.
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Table of Contents
Preface ix
1 The Economics of Addiction 1
2 Smoking Can Kill You 26
3 Let's Drink to Your Health 62
4 All You Can Eat 89
5 We Know What's Best for You 120
6 The New Paternalism: Final Observations 152
References 163
Index 187